"Anytime a car company buys a component from a supplier, that supplier has to charge a profit. If an automaker can make those components in-house, it gets to keep that profit. VW is building a lot of components in-house."

Makes the assumption that keeping it in-house and keeping the profit is better than taking bids from outside suppliers who have to compete with each other to be more efficient. Keeping all in-house is risky as it could reduce the need for innovation and greater efficiencies in manufacture.

VW remember nearly went bust in the 60s/70s with Beetle sales falling, K70 failing and all the other rear engine variants not selling either. Buying Audi with their FWD expertise saved them and paved the way for the Golf Passat etc.

"Anytime a car company buys a component from a supplier, that supplier has to charge a profit. If an automaker can make those components in-house, it gets to keep that profit. VW is building a lot of components in-house."

Makes the assumption that keeping it in-house and keeping the profit is better than taking bids from outside suppliers who have to compete with each other to be more efficient. Keeping all in-house is risky as it could reduce the need for innovation and greater efficiencies in manufacture.

VW remember nearly went bust in the 60s/70s with Beetle sales falling, K70 failing and all the other rear engine variants not selling either. Buying Audi with their FWD expertise saved them and paved the way for the Golf Passat etc.

One of the big reasons for the switch to suppliers in the first place was the tremendous amount of infrastructure required to keep everything in house. The biggest risk factor isn't lack of innovation, but rather having a ton of fixed costs that can't be easily unloaded if the market goes south, margin shrinks, or demand dries up. There is a reason that most car companies don't do this.

It has many potential advantages, but also some really whopping disadvantages that could sink a company.

Nice article. I wish it would go into more detailed analysis. Obviously, VW sells a lot of different products and many don't over lap, and the average Joe may not know that VW owns them. The fact that each brand has its own unique identity and runs like an independent company really ensures that great products will come out of each brand, vs. the situation at Acura.

The Euro was much higher, and VW waas suffering. Now? China is on triple steroid, Euro is collapsing, thnaks to those Greeks, Italians, Spaniads, haha. And Vw is laughing all the way to the bank.

It was a pivotal year for Volkswagen AG, as it faced restructuring on three continents in 2005.

The storied German group that includes VW, Audi, Bentley, SEAT, Skoda, Lamborghini and Bugatti, was dealing with troubles at home, where productivity lagged world standards, and addressing falling sales and revenue in North America and China.

Much of the drama in Wolfsburg stemmed from VW’s attempt to get at the root of its problem: its position as a high-cost producer of a limited range of vehicles for diverse international markets.

Of VW’s 343,000 workers, about 179,000 were based in Germany, including 103,000 in Wolfsburg, home to its oldest and largest plant. Unfortunately, Germany was the most expensive place to manufacture cars – and the most resistant to addressing its high cost and low productivity.

German workers were paid an average of €34 ($41) an hour in 2005, compared with about €25 ($30) in the U.S. VW’s generosity over the years had resulted in wages some 11% higher than the auto maker’s domestic peers, and about 20% higher than the competition in general.

Historically, well-paid workers were not an issue, as buyers always appeared willing to pay a premium for German engineering and technology. It was harder for VW, though, because of its heritage of affordable vehicles.

The cost situation was exacerbated by the strength of the euro against the dollar and the competitive pricing structure in North America.

“When we export vehicles to the U.S., we are losing 3-digit (hundreds of) millions (of euros),” said Wolfgang Bernhard, who took over as chairman of the VW brand group May 1. Without a solution, “there is no future for European manufacturing,” he said.

Bernd Pischetsrieder

Both Bernhard and Bernd Pischetsrieder, chairman of the board of management and defacto CEO, were outspoken on the need to cut thousands of jobs and increase the efficiency of those remaining. Fewer heads, and less cost per head, became the company’s mantra.

The auto maker had been hard-pressed to rein in labor costs over the years, in part due to its governance structure where the state of Lower Saxony was the largest shareholder.

That changed in 2005, when Porsche AG became the biggest shareholder with its October purchase of an 18.53% voting stake. Lower Saxony still held a powerful 18.2% and a vested interest in maintaining a healthy, well-paid regional workforce in a country grappling with 11.4% unemployment.

Pischetsrieder and Bernhard attempted to use the current crisis to dismantle some of that national infrastructure, much like former CEO Ferdinand Piech did in 1993 when 12,500 of 130,000 overpaid, over-trained and under-productive workers were let go.

By 2005, VW had global capacity to build about 6 million vehicles annually. It sold 5.1 million in 2004.

Reports put the job-reduction target as high as 30,000. Wage cuts in the 20%-40% range were said to be necessary, and factories were targeted for more flexibility and efficiency.

As part of a quest to improve the cost structure on all vehicles over three years, Bernhard was pushing for shift changes at Wolfsburg, where staff balked at ending a 4-day work week that allowed for a lucrative night-shift bonus. Resolving this issue would save €60 million ($73 million) annually, he claimed.

To underscore the gravity, management used sourcing of a Golf-based cross/utility vehicle, known as the Marrakesh, to deliver an ultimatum. Assembly of the pending compact CUV was Wolfsburg’s to lose. The additional output was dangled in front of a plant operating at 70% capacity, but only if workers represented by the powerful trade union IG Metall agreed to concessions.

A labor model already existed. VW developed a program known as Auto 5000 GmbH in 2001 to produce the Touran compact multipurpose vehicle in Wolfsburg, in what essentially was a factory within the factory. Roughly 5,000 workers were paid about 20% less to build the Touran, and they worked overtime, for no additional pay, if a mistake was traced back to the assembly line.

VW officials said they could shave €850 ($1,000) per vehicle off the Marrakesh program by integrating it with Touran production. IG Metall was given a Sept. 26 deadline to agree to Auto 5000 or another form of lower-cost manufacturing.

Without a solution, management said it would build the Marrakesh in Portugal, where costs were projected at €1,000 ($1,222 per vehicle) less than Wolfsburg’s.

Bernhard said the development team for the CUV had trimmed €2,000 ($2,445) from the cost of the vehicle, but it still was €800-€900 ($980-$1,100) shy of being globally competitive. He said the difference had to come from manufacturing – ideally from a compromise that would allow the Marrakesh to be built in Germany.

Talks went to the wire, but the union ultimately agreed to shift from Wolfsburg’s expensive in-house wage structure to the Auto 5000 model, where lower-paid workers would build the Marrakesh alongside the Touran. The move was expected to save about 1,000 German jobs.

In return, the company committed to building two more models in Germany, likely a Passat coupe in Emden, starting in 2008, and another Golf variant for Wolfsburg. Both projects also would utilize a modified in-house wage agreement.

Pischetsrieder pronounced the Marrakesh pact a decisive start in being able to export vehicles from Europe profitably, even if the euro were to remain strong.

Efforts to preserve a manufacturing presence in Germany, as well as other weighty decisions to turn the auto maker’s fortunes around, fell on Pischetsrieder in his third year since taking over as CEO from Piech, who became chairman of the supervisory board.

The year will be remembered for management upheaval.

Pischetsrieder put his stamp on a new team, while dealing with fallout from an internal sex and corruption scandal in Germany and boardroom intrigue.

The scandal, involving allegations of bribery and embezzlement in several countries, led to the resignation of personnel chief Peter Hartz and raised speculation of a new era where management had more freedom to make decisions without undue influence from the union and government.

But the year ended with a full-scale boardroom power struggle that was far from resolved and continued to widen a rift between Piech and Pischetsrieder.

Former union leader Horst Neumann was appointed board member in charge of personnel, a move opposed by Pischestrieder and Bernhard, but supported by Piech and the 10 supervisory board members with labor backgrounds.

Porsche’s share purchase and clout raised new conflict-of-interest issues, as Piech, the grandson of Ferdinand Porsche and heir to the sports-car fortune, remained VW chairman. His loyalty to VW was questioned repeatedly, and there were suggestions Piech wanted Audi AG CEO Martin Winterkorn to replace Pischetsrieder.

A lobby formed to oust Piech, resulting in an agreement he would relinquish the board chairmanship in 2007. In exchange, Porsche would get two seats on VW’s supervisory board in 2006, including one for Winterkorn. Piech’s replacement as chairman was to be a neutral director, representing neither Porsche nor Lower Saxony.

The year ended with Pischetsrieder’s fate still uncertain, amid suggestions labor would not back a bid to renew his 5-year contract that was set to expire in 2007. In May 2006, the contract was renewed until April 2012.

Outside the boardroom, Pischetsrieder continued efforts to put his handpicked team in place.

To manage the VW brand in North America, Adrian Hallmark, who distinguished himself in sales for Bentley Motors Ltd., was chosen.

Hallmark’s appointment as executive vice president-Volkswagen of America Inc., took effect Oct. 1. He switched jobs with Len Hunt, who was reassigned to the global Bentley post, but chose instead to leave the auto maker for a job with Kia Motors America Inc. In January 2006, Bentley named a second successor to Hallmark, making Stuart McCullough a member of the board, responsible for sales and marketing.

At Audi of America Inc., 2005 was the first year in the top spot of executive vice president for Johan de Nysschen.

In June, Winfried Vahland, former head of the Skoda brand, took over as president of VW’s China operations, replacing the retired Bernd Leissner and overseeing a new sales team.

Also still relatively new to his duties was Stephan Winkelmann, who was lured from Fiat Auto SpA to head Automobili Lamborghini SpA, owned by Audi.

The VW brand group, which accounted for about 60% of sales, faced the biggest challenge. But it was not unlike the one Bernhard tackled as former chief operating officer of Chrysler Group in the U.S. There he was responsible for the cost-cutting portion of a 3-year turnaround plan that involved eliminating jobs, closing plants, reducing shifts, cutting material/purchasing costs, overseeing efficiencies in manufacturing and downsizing the product-development budget while increasing the portfolio.

The issues at VW were eerily similar, Bernhard said as he drafted a 3-year plan expected to cut investment 20% annually over the three years.

His plan called for a period of pain, followed by the introduction of five to 10 additional models, over and above the existing lineup, between 2008 and 2010. The new vehicles would take VW into new segments, such as minivans and compact SUVs.

Financially, progress was made, but Pischetsrieder said he was not satisfied with 2005’s 58.2% pre-tax profit increase of €1.7 billion ($2 billion). Volkswagen Group saw a 3.2% jump in vehicle sales and 7.1% hike in sales revenue to €95.3 billion ($113 billion).

Globally, Volkswagen sales were almost flat, while VW Group brand sales reached a record 5.2 million units – an increase of 3.2% over 2004.

The results were early signs of success for Pischetsrieder’s ForMotion cost-reduction initiative, approved in February 2004. It called for the cutting of 5,000 jobs through attrition and a €3.1 billion ($3.8 billion) cost reduction in 2005, on top of a contribution of more than €2 billion ($2.6 billion) to the bottom line in 2004.

VW followed up with the ForMotion Plus program, which expanded the focus beyond cost reduction, to include sales, marketing and specific product programs.

The objective, Pischetsrieder said, was to improve net pre-tax profit €4 billion ($4.9 billion) by 2008, as compared with 2004. He translated that to a pretax profit of €5.1 billion ($6.2 billion).

Bernhard’s goal was to improve VW brand group profit to €7 billion ($8.5 billion) in the same timeframe, mainly through cost cuts and his pending restructuring plan.

Pischetsrieder said achieving the overall corporate target would require deeper cost cuts to compensate for continuing deterioration in the markets and exchange rate issues. He pegged the objective at a gross savings of €7 billion.

Initiatives included bringing suppliers into product development earlier and greater re-use of parts, technologies and tooling.

Pischetsrieder remained committed to the modular strategy initiated three years earlier that encouraged component sharing across products and brands and was expected to result in another €1 billion ($1.2 billion) in savings on purchasing in 2006. It would be rolled out with each new generation of vehicle.

Pischetsrieder hoped to save another €1 billion in personnel costs over the next couple years. In 2004, the auto maker said it needed to reduce personnel costs by €2 billion ($2.4 billion) by 2011. The first €1 billion would be achieved in 2006, under terms of the contract negotiated in November 2004 that guaranteed no layoffs until 2011 in exchange for a 28-month pay freeze.

But in 2005, Pischetsrieder said VW could not wait until 2011 for the additional €1 billion in personnel cuts. “We have to bring that forward,” he said.

That included operations in China, where VW saw stiff price competition and falling sales. China was VW’s second-largest market after Germany.

The auto maker once held a commanding 50% of the Chinese market and was reporting growth of about 30% as recently as 2003. But VW saw its sales lead fall to General Motors Corp. midyear, and revenue from its two joint ventures continued to fall.

The auto maker said restructuring was under way, and expansion plans for China were on hold. Hopes of breaking even in 2005 in China were not met, as the JVs reported a combined €119 million ($150 million) loss.

In North America, VW lost €843 million ($1.1 billion), a slight improvement on 2004, even though U.S. sales declined 12.5%.

Pischetsrieder said he did not expect a profit in the region until 2007.

One of the great icons of German industry is under threat. Built to construct one million vehicles a year, Volkswagen's Wolfsburg plant is the largest car factory in Europe. It assembles the Golf, one of the world's most successful cars and Europe's biggest seller. Yet its workforce currently produces 700,000 vehicles a year, making it one of the most costly and least efficient car plants in the world.

"We build great cars. But our costs are far higher than our targets," Wolfgang Bernhard, head of the VW brand, told the Wolfsburg workforce just over a week ago. "Let us all pull together to make this plant viable and your jobs safe. Wolfsburg has to get off the reserves' bench and become
our striker."

The striker is severely injured at the moment. With its four chimneys and brick-block construction, Wolfsburg towers like a vast Battersea power station above the North German Plain. It has 75,000 employees, of whom 25,000 work in administration at VW's headquarters, while 10,000 make parts for the assembly line.

Mr Bernard, who was booed and whistled at by the Wolfsburg workforce, unveiled charts showing that VW loses €1,020 (£700) on every Golf it makes. The new Golf, to be launched in 2009, has to be at least €1,500 cheaper to build. This would make it profitable, but if the car is to be competitive, costs would probably have to be even lower than that. Meanwhile, price pressure is hitting home, and traditional Golf drivers are deserting it for other cars, such as SUVs.

Cost-cutting will require dropping over-engineered features, including the Golf's complex rear-axle, to slash construction time from 50 hours to less than 30. Purchasing, logistics and manufacturing processes have to be improved. But, above all, it means fewer jobs.

"We must make our labour costs competitive," Mr Bernhard said. "If we do that, cars can be produced in Wolfsburg competitively. Secure jobs depend upon competitiveness."

Mr Bernhard wants to raise the 28.8-hour working week on the assembly line to 35 hours without raising pay. This would bring Wolfsburg and VW's other plants in line with their German competitors. At the same time, he hopes to persuade 20,000 German workers to leave VW with voluntary redundancy packages worth up to €250,000 each. To date, just 800 workers have opted to do so. The unions point out that VW's plants are located in areas of high unemployment, and the payments would be halved by tax. The chief union negotiator, Hartmut Meine of IG Metall, has flatly refused to renegotiate the current contract, which guarantees job security past 2010.

The crisis at Wolfsburg and VW is so deep that Mr Bernhard recently aired the idea that the next Golf might not be built there. "We want to build the next Golf in Wolfsburg," he said, "but only if the company does not pay for every car sold."

The suggestion that Wolfsburg might, in effect, be closed down caused union outrage. Anger was also expressed about a story, quickly denied by the company, that suggested VW wanted to cut its German workforce by 30,000.

Feelings are running high. The unions are now gearing themselves for strikes and protests as sensitive talks on jobs and wages restart later this week.

Yet fundamental change is inevitable, according to analysts. "Little has happened to date," says Albrecht Denninghoff at HVB Equity Research. "VW announced its profits target last year and we have seen no great change. The unions rightly demand an overall plan, which we have not seen. Frankly, we are rather surprised by the way the company has behaved."

Another analyst, who asks not to be identified, adds: "VW has to move to a 35-hour week without additional pay, then it has to cut its overcapacity. It can make six million cars at its German plants but sells only five. It will need many successful models to make up the difference. I don't see it happening. It is hard to be optimistic for employees."

VW set itself the goal of achieving profits of €5.1bn in 2008. Yet this would only move it close to covering its costs. It would not make it competitive.